Accounting Assignment Essay writing help analysis online: Description of international banking and finance & European developments
Question Asked??
Write a description on International banking & finance and its european developments??
Solution proposed::
Task one: Identifying the behavior of the foreign exchange market
At any given time, national currencies move relative to one another. The strength which Australian dollar has shown in the last ten years has made this currency the most discussed one among economists. Despite the fact that there has been a deficit in the current account and foreign debts are continuously moving northwards, there is a constant rise in the real exchange rate. Real exchange rates can be defined as the price of the average domestic good or service relative to the price of the average foreign good or service. In comparison to historical standards, The Australian Dollar is still trading at a high levels. Despite the fact that nominal trade weighted index has crossed its high levels of multiple decade, in terms of trade also there has been constant fall and outlook for global economy is deteriorating continuously; still there has been a constant rise in the Australian Dollar.
In 1983, Australian Dollar was floated in the money market. Supply and demand forces for Australian currency prevailing in the market determine the level of Australian Dollar. The association of the currency with the international trade and flow of funds in the region has remained the major reason behind the appreciation which Australian Dollar has seen in the past.
A study of last one year exchange rate of Australian dollar to US Dollar indicates Historical Data Test Forecast Accuracy (HDTFA) of 0.09, this suggests that in October 2013 the currency exchange rate for AUD/USD may fall between the range of 1.09 and 0.91. In another words, Australian Dollar will be roughly 1.00 Australian Dollars to the USD. The average exchange rate for AUD to USD stood at 0.96 for the month of September 2012. In comparison to August 2012, when this exchange rate was 0.95, it was up by 0.6 basis points. However, If one will compare it on yearly basis, exchange rate in September 2012 was lower by 1.6 basis points in comparison to September 2011, when it was 0.98. In the past 12 months, the average Australian Dollar conversion rate stood at 0.97. If we will go deep in the history, in the past ten years average rate has howered around 1.24. Thus the Australian Dollars to US Dollars exchange rate over the last 12 months have remained on the lower side which clearly indicates downward trend in the exchange rate of AUD/USD in long term; i.e. Australian Dollar is getting strong in comparison to US Dollar.
Developments in Europe has also influenced foreign exchange markets internationally as well as in Australia. Uncertainty in the Greece elections and continuous increase in concerns in Spain lead to a sharp decline in international currencies in comparison to US Dollar. Return on some risk free assets which are euro dominated even went down to zero during May 2012. In general it is seen that currencies which are risk-sensitive in nature see appreciation against the US dollar.This weakness took Euro to a 10 year low on the basis to trade weights and to 12 year low against Australian dollar. Safe haven and repatriation flows have always supported the US Dollar and Japanese Yen. Particulalry at the time of Greek Elections, both the currencies saw an appreciation on the basis of trade weight. From the beginning of the year 2012, there has been an appreciation of one percent in US Dollar. In comparison to historical standards, this appreciation is still very low. Even in case of Yen also, there has been an appreciation which is quite lower than the US Dollar. Yen was at its peak levels during 2011, and presently it is just below those ten year high levels. The high levels of Yen during the year 2011 compelled Japanese authorities to bring down the currency. Even in present situation also, Japanese authorities are all set to intervene in case this appreciation in Yen continue in the same manner.
The global economy still remains weak with no massive changes witnessed over the past quarters. In particular, with economic data from the Euro-zone and China taking a turn for worse, the prospects of recovery looks more fragile. Europe is significantly affecting the global growth outlook today, amid Germany’s new export business declining at the most considerable pace since November 2011, which was showing some resilience till now. Purchasing managers’ numbers further showed that euro zone’s manufacturing as well as services sector was hit hard in June along with rising unemployment rates. Though, the European Central bank (ECB) might have lowered its benchmark rates to 0.75 to record lows from the 1% mark whereas its deposit rates to zero, in order to help the struggling banking system and deal with the debt crisis, is unlikely to solve the overall issues of public sector and external debt sustainability.
To summarize, it looks very difficult for Australian Dollar to touch the levels of $US1.08 which it saw in the beginning of the year 2012.Weakening commodity prices, declining trading terms and falling interest rates in Australia all are the key reasons that will curtails any major movement in the Australian Dollar in near future. Any movement which can take Australian Dollar significantly higher against the US Dollar is solely dependent on three major factors. First and foremost is the stabalisation in economic growth of China in the range of 7-8%, downward movement in the official interest rates of Europe and quantitative easing in the United States. Higher interest rates in Australia could also see the AUD move higher and while we do not expect this in the near term, it remains a possibility later in 2013. There are certain X-factors as well which directly impact the exchange rate of Australian Dollar, for example the The MX missile crisis of 1985 and the infamous ‘banana republic’ comments of 1986 have impacted negatively on the AUD over an extended period. In the current climate we face events such as the US Presidential elections, the US ‘fiscal cliff’, ongoing European bond auctions, a possible European banking crisis and ongoing flare-ups in the Middle East.
Task two: Factors affecting to foreign exchange rates
The global economy has clearly lost the momentum in the first half of the 2012, with euro zone’s spill-over’s felt in almost all the advanced and emerging economies. Europe’s financial agony has passed on globally with declining trade, surging crude oil prices and increasing volatility in financial markets. On the whole, global economic indicators continue to disappoint, with all leading indicators showing a near negligible growth. To be more precise, the euro zone’s GDP growth contracted in the second quarter by 0.2% from the first quarter. Euro-zone’s manufacturing activity contracted for the 13th successive month in August at 45.1, as exports in Germany, the bloc’s main engine of growth, fell at the sharpest rate in 3-years. Services on the other hand, collapsed slightly faster than estimated at 47.2, with continued fall in new business. On the whole, pointing to another fall in growth in the current third quarter, which will mark the bloc’s second recession in three years; there is little relief in outlook for the bloc. Though, the ECB has controlled to ease financial pressure on the government of Spain, but much remains to be done to prepare the entire euro-zone to get out of the doldrums.
The US economy witnessed a modest growth of 1.5% in the second quarter, which was better than consensus estimates, but not up to the mark. Further, US growth is being confronted by the growing uncertainty over higher taxes and lower spending along with the ‘fiscal cliff’ just round the corner, which will crimp the economy in the second half of the year. Further, the slowdown in the emerging economies have been of great concern, mainly due to the steep decline in trade flows attributable to the weakening situation in developed countries mainly euro zone along with the earlier tight monetary policy stance followed to curb the swelling inflationary pressures. Among them, China and Brazil are off their high growth level when compared with their respective performances in recent years.
Of all the negative trends, the central banks of the US and Europe with an aim to provide further stimulus to the economy activity, reacted with liquidity measures. To be more specific, the European Central Bank (ECB) to improve the situation of euro-zone’s debt crisis announced that it would implement unlimited bond buying. Similarly, the US Federal Reserve announced that it would launch a new round of bond buying at a pace of $40 billion a month until labour market conditions improve substantially, to support the economy. These measures for the short-term will certainly alleviate risks revolving around economic growth and financial markets, however in the long run it is likely to add downward pressure on the US dollar, which could also push commodities prices higher and accordingly add fuel to the risk of global inflation. Further, it also raises the question about the effectiveness of the measures, especially when it is having its ill-effects on currency, commodities and inflation in the long run. On the whole, even after the liquidity measures adopted by majority of central banks, there still survive omnipresent risks to overall global economic prospects.
The global macro-economic scenario has weakened further with euro-zone’s debt crisis showing no signs of fading away, though US continue to hold up better when compared to other developed countries. Global PMI’s have registered their lowest level of growth and prospects of recovery to the previous level’s growth in the current year looks unlikely with worsening economic indicators. On the other hand, emerging Asian economies, which have shown some kind of resistance amid the global economic recession, are off their relatively high growth rates and showing signs of slowdown. Further, the International Monetary Fund (IMF) in July, revised its growth projections for global economy taking into account the macroeconomic situations, declined to 3.9% from the earlier projected 4.1% for 2013. The revision in the growth numbers clearly suggests that attaining the pre-crisis level of growth will take a number of years, since the ongoing issues with sovereign debt have escalated, mainly in the euro-zone.
To be more precise, Europe remained the main source of weakness, with manufacturing and services activity, both hitting the lower level in July. However, downturn was more in manufacturing, witnessing a growth of 44 in July, the lowest in 37-months, which also shows that manufacturing activity has contracted for 12 successive months. Further downfall is expected, especially when there are no signs of concrete solution to the ever-deteriorating sovereign debt and banking problems. The US economy, on the other side is appearing to be losing its growth momentum as uncertainty continues to haunt its growth path. Growth in the manufacturing sector slowed for third consecutive month to 51.8 in July, the slowest since December 2010. However, the private-sector payrolls increased 163,000 in July, mainly on the back of small businesses and services sector. Though it may be higher than expected, it is nonetheless too low to notably reduce unemployment level. The economy is clearly in the midst of another soft patch as headwinds from the ongoing euro zone debt crisis and other domestic uncertainty continue to reflect on consumer spending, employment, and investment decisions.
The UK economy has also lost the growth momentum, with Q2GDP growth contracting worse than expected at 0.7%. Manufacturing activity too shrank by 1.4%, with PMI witnessing the lowest growth in 38-months, mainly on the back of falling output and new work orders. Further, the debt crisis in the euro-zone, which accounts for around 40% of UK’s exports, is likely to weigh heavily on the country’s prospects going forward, if the situation worsens in Euro economy. Following the similar trend, the Japanese economy is also showing signs of economic activity moderating, following strong GDP growth in the first quarter of 2012. Posting a weaker-than-expected economic growth of 1.4% in the second quarter of 2012, the data gave clear signs that the economy is faltering. Further, weak sentiments can also be seen in the manufacturing sector, with Japan’s manufacturing purchasing managers’ index showing a headline figure of 47.9 in July, down from 49.9 in June, the lowest in 15 months, mainly on the back of weak export demand from China, Europe and the US.
Taken as a whole, global economic growth is almost near the stagnation level as the impact of weak growth trends has become broad-based across countries and if not corrected with proper policy measures, the growth may slip into further down.
PA09
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